Where Should A Franchisor Set Up Its Headquarters?

One of the first considerations that many responders mentioned, perhaps because as lawyers we so frequently deal with them, was whether the state in question subjected franchisors to franchise regulation in the form of a state registration/disclosure law or a franchise relationship law. States with strong, pro-franchisee franchising statutes ' California, Maryland and New Jersey, for example ' were almost never suggested as potential locations for a franchisor to set up headquarters.

Other commenters were more circumspect, however, pointing out that many states with franchise statutes limit the application of the laws to franchisees that actually reside in or operate locations in that state. Accordingly, a franchisor setting up its headquarters in California, for example, would have to be concerned with the application of the California Franchise Relations Act to its California franchisees (because the statute is jurisdictionally limited to franchisees domicile in the state or operating a franchised business in the state), but so would every other franchisor who had franchisees located in California, regardless of where the franchisor was headquartered. In addition, because many franchisors offer franchises nationally and prepare a single FDD compliant with both the FTC Franchise Rule (as amended March 30, 2007 available at http://1.usa.gov/16LxxhH) and the regulations of all registration states, being headquartered in a registration state might have little practical effect on the registration process and the day-to-day operations of the franchisor.

Thus, while many responders identified state franchise regulation as an important consideration, a number of individuals felt that the issue was granted greater importance than it deserved. Even more important to some than the issue of franchise regulation was whether the state in question was generally considered to be pro-business, such as its tendencies to enforce non-competition covenants and honor the concept of “at-will” employment.

State Taxation

The degree of state taxation was another issue frequently mentioned, due to the obvious bottom-line impact. Whether or not a state had income tax, either individual or corporate, and/or sales tax, affected the perception of whether the state would serve as a good location for a franchisor's corporate headquarters. Notably, states such as Nevada, South Dakota, Washington and Wyoming have no corporate income tax. While other factors might cause a franchisor to reject South Dakota, Wyoming (weather, access to transportation, isolation from rest of country, etc.) and maybe Washington (franchise regulation) as a potential site for a headquarters, a number of people gave the thumbs up to Nevada and expressly commented upon Nevada's lack of taxation (made possible, of course, by its thriving tourism sector). Other states that scored highly because of low tax rates were Georgia (6.0%), Oklahoma (6.0%), Tennessee (6.5%) and Virginia (6.0%).

A number of individuals pointed out, however, that regardless of where a franchisor is headquartered it may be subject to taxation in states where it or its franchisees do business, and that many states are becoming increasingly aggressive at collecting such taxes from out-of-state franchisors.

Access to Transportation

Franchisors tend to have executives, sales teams and operations teams that travel frequently and extensively. Not surprisingly, easy access to a hub airport with direct flights to many cities domestically and internationally was frequently mentioned as a critical consideration. Cities like Atlanta, Chicago, Dallas/Ft. Worth, Denver, Las Vegas and Phoenix were praised for the access their airports provide to direct flights to multiple locations.

Also mentioned was geographic proximity to large population centers where franchise units are likely to be developed. Thus, the Northeast corridor from Boston to Washington was seen as desirable because a large percentage of the U.S. population (including both potential franchisees and their customers) resides there. Also, the cities are relatively close to one another and they are easily accessible by air and train.

Access to a Well-Educated, Low-Wage Labor Pool

A number of commenters mentioned the importance to a franchisor of having access to a strong, well-educated, low-wage labor pool. Franchisors, like most companies, are comprised of a group of individuals working together for a common purpose. The success or failure of a franchise system can depend in large degree on the quality of the individuals the franchisor is able to employ. When advocating for a preferred geographic location, a number of individuals referenced the fact it was a “university town,” or otherwise was comprised of residents who generally were considered to be highly educated. Others mentioned that the labor pool in the location for which they were advocating was less expensive than comparable locations. Some claimed that their preferred location had both attributes.

Quality of Life

Also frequently mentioned, but perhaps hardest to quantify due to its highly subjective nature, was “quality of life.” Included within this concept were factors like the cost of real estate and the cost of living, generally. Accessibility to the arts and to nature were mentioned as desirable factors by a number of people ' the theory presumably being that the more enjoyable it is to live where the franchisor sets up its headquarters, the higher the quality of employees the franchisor will be able to recruit and the happier the franchisor's workforce will be.

And the Winners Are '

Historically, many franchisors' headquarters are located where they are simply because the entrepreneur who first started the concept lived nearby, and an adequate reason to relocate never occurred. But the question I posed assumed a clean slate.

Of course, the determination of the “best” location for a franchisor to set up its headquarters may depend on factors in addition to those listed above, and, undoubtedly, will be affected by how an individual franchisor prioritizes the factors being considered. Nevertheless, stripping away local bias, there did appear to be a few cities that were repeatedly mentioned because they had many of the attributes that most considered to be important.

In the West, multiple individuals mentioned Las Vegas because of its lack of state tax, accessible airport with many direct flights both nationally and internationally, educated and low-cost work force, inexpensive real estate and relatively high quality of life. In addition, Nevada has no state franchise regulation and is generally considered pro-business. In the East, a number of people mentioned Atlanta due to its low state tax, accessible air transportation (the busiest airport in the U.S.), educated work force and relatively high quality of life. Also, Georgia is a state without franchise regulation and is generally considered to be pro-business (now that it is enforcing non-competition provisions). Other cities that received repeated and positive mentions included, in no particular order: Nashville; Charlotte; Philadelphia; Houston; Dallas; Seattle; Salt Lake City; Phoenix; and Chicago.

Conclusion

The “best” location for a franchisor to set up its headquarters in the U.S. will vary, depending on the viewpoint of the particular franchisor. However, the general consensus among franchise law practitioners is that important factors to consider include, among others:

• A state's franchise regulations, or lack thereof;
• A state's general business environment;
• State taxation;
• Access to convenient, reliable and low-cost transportation;
• Access to a well-educated, low- cost work force; and
• General quality of life issues.

James Goniea is a partner in the Philadelphia office of Wiggin and Dana. He can be contacted at [email protected].

What is the best location in the United States for a franchisor to set up its headquarters? That is the question I recently posed to the ABA Forum on Franchising Listserv. The query elicited a flurry of fascinating responses, many of them quite detailed and well-considered.

Most of those responding felt that their own city and state was the “best” place for a franchisor to be headquartered. I suppose that is understandable because: 1) most people live where they do by choice and, presumably, do so because they like it there; and 2) franchise attorneys are always eager to have more franchisors nearby who might serve as sources of potential work. However, after sifting through the responses and discounting local bias, there appeared to be at least a general consensus concerning the factors that should be considered in deciding where a franchisor, given the choice, should set up its headquarters (even while there was considerably less agreement concerning actual geographic location). Below, in no particular order, are the factors that people responding to my inquiry most frequently identified.

State Franchise Regulation/Business Environment

One of the first considerations that many responders mentioned, perhaps because as lawyers we so frequently deal with them, was whether the state in question subjected franchisors to franchise regulation in the form of a state registration/disclosure law or a franchise relationship law. States with strong, pro-franchisee franchising statutes ' California, Maryland and New Jersey, for example ' were almost never suggested as potential locations for a franchisor to set up headquarters.

Other commenters were more circumspect, however, pointing out that many states with franchise statutes limit the application of the laws to franchisees that actually reside in or operate locations in that state. Accordingly, a franchisor setting up its headquarters in California, for example, would have to be concerned with the application of the California Franchise Relations Act to its California franchisees (because the statute is jurisdictionally limited to franchisees domicile in the state or operating a franchised business in the state), but so would every other franchisor who had franchisees located in California, regardless of where the franchisor was headquartered. In addition, because many franchisors offer franchises nationally and prepare a single FDD compliant with both the FTC Franchise Rule (as amended March 30, 2007 available at http://1.usa.gov/16LxxhH) and the regulations of all registration states, being headquartered in a registration state might have little practical effect on the registration process and the day-to-day operations of the franchisor.

Thus, while many responders identified state franchise regulation as an important consideration, a number of individuals felt that the issue was granted greater importance than it deserved. Even more important to some than the issue of franchise regulation was whether the state in question was generally considered to be pro-business, such as its tendencies to enforce non-competition covenants and honor the concept of “at-will” employment.

State Taxation

The degree of state taxation was another issue frequently mentioned, due to the obvious bottom-line impact. Whether or not a state had income tax, either individual or corporate, and/or sales tax, affected the perception of whether the state would serve as a good location for a franchisor's corporate headquarters. Notably, states such as Nevada, South Dakota, Washington and Wyoming have no corporate income tax. While other factors might cause a franchisor to reject South Dakota, Wyoming (weather, access to transportation, isolation from rest of country, etc.) and maybe Washington (franchise regulation) as a potential site for a headquarters, a number of people gave the thumbs up to Nevada and expressly commented upon Nevada's lack of taxation (made possible, of course, by its thriving tourism sector). Other states that scored highly because of low tax rates were Georgia (6.0%), Oklahoma (6.0%), Tennessee (6.5%) and Virginia (6.0%).

A number of individuals pointed out, however, that regardless of where a franchisor is headquartered it may be subject to taxation in states where it or its franchisees do business, and that many states are becoming increasingly aggressive at collecting such taxes from out-of-state franchisors.

Access to Transportation

Franchisors tend to have executives, sales teams and operations teams that travel frequently and extensively. Not surprisingly, easy access to a hub airport with direct flights to many cities domestically and internationally was frequently mentioned as a critical consideration. Cities like Atlanta, Chicago, Dallas/Ft. Worth, Denver, Las Vegas and Phoenix were praised for the access their airports provide to direct flights to multiple locations.

Also mentioned was geographic proximity to large population centers where franchise units are likely to be developed. Thus, the Northeast corridor from Boston to Washington was seen as desirable because a large percentage of the U.S. population (including both potential franchisees and their customers) resides there. Also, the cities are relatively close to one another and they are easily accessible by air and train.

Access to a Well-Educated, Low-Wage Labor Pool

A number of commenters mentioned the importance to a franchisor of having access to a strong, well-educated, low-wage labor pool. Franchisors, like most companies, are comprised of a group of individuals working together for a common purpose. The success or failure of a franchise system can depend in large degree on the quality of the individuals the franchisor is able to employ. When advocating for a preferred geographic location, a number of individuals referenced the fact it was a “university town,” or otherwise was comprised of residents who generally were considered to be highly educated. Others mentioned that the labor pool in the location for which they were advocating was less expensive than comparable locations. Some claimed that their preferred location had both attributes.

Quality of Life

Also frequently mentioned, but perhaps hardest to quantify due to its highly subjective nature, was “quality of life.” Included within this concept were factors like the cost of real estate and the cost of living, generally. Accessibility to the arts and to nature were mentioned as desirable factors by a number of people ' the theory presumably being that the more enjoyable it is to live where the franchisor sets up its headquarters, the higher the quality of employees the franchisor will be able to recruit and the happier the franchisor's workforce will be.

And the Winners Are '

Historically, many franchisors' headquarters are located where they are simply because the entrepreneur who first started the concept lived nearby, and an adequate reason to relocate never occurred. But the question I posed assumed a clean slate.

Of course, the determination of the “best” location for a franchisor to set up its headquarters may depend on factors in addition to those listed above, and, undoubtedly, will be affected by how an individual franchisor prioritizes the factors being considered. Nevertheless, stripping away local bias, there did appear to be a few cities that were repeatedly mentioned because they had many of the attributes that most considered to be important.

In the West, multiple individuals mentioned Las Vegas because of its lack of state tax, accessible airport with many direct flights both nationally and internationally, educated and low-cost work force, inexpensive real estate and relatively high quality of life. In addition, Nevada has no state franchise regulation and is generally considered pro-business. In the East, a number of people mentioned Atlanta due to its low state tax, accessible air transportation (the busiest airport in the U.S.), educated work force and relatively high quality of life. Also, Georgia is a state without franchise regulation and is generally considered to be pro-business (now that it is enforcing non-competition provisions). Other cities that received repeated and positive mentions included, in no particular order: Nashville; Charlotte; Philadelphia; Houston; Dallas; Seattle; Salt Lake City; Phoenix; and Chicago.

Conclusion

The “best” location for a franchisor to set up its headquarters in the U.S. will vary, depending on the viewpoint of the particular franchisor. However, the general consensus among franchise law practitioners is that important factors to consider include, among others:

• A state's franchise regulations, or lack thereof;
• A state's general business environment;
• State taxation;
• Access to convenient, reliable and low-cost transportation;
• Access to a well-educated, low- cost work force; and
• General quality of life issues.

James Goniea is a partner in the Philadelphia office of Wiggin and Dana. He can be contacted at [email protected].